Durability of Output and Expected Stock Returns

The demand for durable goods is more cyclical than that for nondurable goods and services. Consequently, the cash flow and stock returns of durable-good producers are exposed to higher systematic risk. Using the benchmark input-output accounts of the National Income and Product Accounts, we construct portfolios of durablegood, nondurable-good, and service producers. In the cross-section, an investment strategy that is long on the durable portfolio and short on the service portfolio earns a risk premium exceeding four percent annually. In the time series, an investment strategy that is long on the durable portfolio and short on the market portfolio earns a countercyclical risk premium. We develop a general equilibrium asset-pricing model, based on a two-sector production economy, to explain these empirical findings. JEL classification: D57; E21; G12